Confused about why your home costs more to rebuild than what you paid for it?

Written by on 2012-09-13 8:43 AM in , , , . It has 2 Comments.

You're not alone.  It’s strange and sometimes confusing that there could be so many different numbers (listing price, home insurance rebuilding cost, tax assessment) about the same object; your home.  Let’s look at each in turn.

Market Value

The market value of your home is the price you can expect to receive from a buyer in a fair and open negotiation.  Depending on the neighbourhood and city the market value for a similarly sized home could vary dramatically.  For example, a 2000 square foot bungalow could go for $450,000 in Waterloo, but that exact same home could go for $1,000,000 in the heart of Toronto.  The market value of a home has no bearing on your home insurance.  Simply, the market value is the price someone is willing to pay for a home.

Property Tax Assessment

The property tax assessment of your home in Ontario is based on the work by the Municipal Property Assessment Corporation or MPAC.  You can find out more about them here.  They assign property values based on 200 factors such as sales of homes in the same neighbourhood, the location, lot dimensions, living area, age of the property, and quality of construction of the home in question.  Two of these factors, lot dimensions and sales of homes in the vicinity, do not affect your home insurance rebuilding costs at all.  Your municipality then assigns taxes based on MPAC's property value assessment of your home.

Rebuilding Cost

So, what do insurance companies use to determine the rebuilding cost of your home?

Apart from knowing the age, size, dimensions (not including the lot), and the quality of your home and the costs of labour and building supplies (which constantly fluctuate) there are other important factors that determine how much your home will cost to be rebuilt if it is totally destroyed.  Typically, these factors are not used to determine market value or property assessments for tax purposes.

1.    Demolition and Debris Removal
When a home has been involved in a claim, where it has been totally destroyed, there is a lot of work to be done before a new home can be built.  The whole structure must be demolished and removed.  The cost to transport and dispose of the debris of a home can be expensive. The insurance company will hire contractors to do this work for them.  If the damage is severe enough even the foundation may require excavation and removal.  So, for home insurance we base the rebuilding cost on the worst case scenario to ensure there is enough coverage in the event of a total loss of a home.

2.    Environmental Costs
Increasingly we rely on electronics and technology in our homes.  From computers and smart phones to entertainment centres and children’s toys there are a lot of electronic components.  Once the debris is removed the ground is tested to ensure it is not contaminated.  This increases a home’s rebuilding cost.  

3.    Access to the Work-site
Sometimes, homes in a neighbourhood are built very close together, or have mature trees lining the boulevard.  Home insurance companies take these factors into consideration.  This can mean special equipment must be brought in to mitigate further damage to the neighbourhood or property.

4.    Special Features
Some homes have very unique and special materials.  The more unique the building material the more expensive and time consuming it is to find.  That is why we take the time to ask clients detailed questions about their homes.  We want to ensure their home has the most accurate coverage possible.  If a client has imported Brazilian Cherry wood for their floors or Italian marble in their bathroom you can bet this is neither easy nor cheap to replace.  The rebuilding cost calculations must take all this information into account.

5.    Other Costs
Sometimes a home is damaged so much that other costs creep into the bottom line.  Things like permits or draft and architectural fees all increase the cost to rebuild a home.

6.    Satisfying the Policy Holder
Finally, the insurance company’s primary goal is to get you back into your home as quickly as possible.  This can mean paying greater labour costs to ensure contractors work on your home and not someone else’s.  Labour typically accounts for 50% of a home build, but if there is a catastrophic event, such as the tornado in Goderich (read here for more information about the tornado and what to do in the event of one), this can trigger natural disaster inflation.  

Construction costs rise sharply after natural disasters because there are labour and material shortages.  Labour and materials must be brought in from further away, causing costs to increase.  That’s why having Guaranteed Replacement Cost on your homeowner’s insurance policy is so important.  Any cost increases associated with labour or supply shortages will still be covered by your home insurance policy.

What about our 2000 square foot bungalow?  It would cost approximately $480,900 as of June 2012 to rebuild in Waterloo, and approximately $488,250 to rebuild in Toronto.  Not much difference in rebuilding costs, but considerable difference in market value from $450,000 in Waterloo and $1,000,000 in Toronto.  Sometimes the home rebuilding cost can be much higher than its purchase price.

Ontario home insurance is complex and getting more so each year.  The upside is, as insurance brokers, we take the time to talk to you to make sure your biggest investment is properly covered and that you understand your policy.

As always please if you have any insurance related questions about your home or property or a claim situation let us know.

Thanks for reading.


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  1. charlie's avatar charlie
    I can't understand that in 2013 the replacement cost on my insurance policy was assessed at $224000 for a 1260 SQ ft home and now for the renewal for 2015/2016 it is at $317000. How do you justify that plus the increase in premium of a $100 more.
    Reply 2015-10-07 4:48 PM
    • Albert Schmidt's avatar Albert Schmidt
      Hello Charlie,

      Thank you for posting. That does seem excessive if the only change was an insurance company's inflation factor. Typically, insurance companies add an inflation factor every year to rebuilding costs. This factor ranges from 4% to 7%. Without knowing more about your specific situation it's hard to comment on why there's that jump.

      Currently, as of September 8, 2015, the rebuilding costs can range from $225 to $250 a square foot to a lot higher if the home is a luxury/custom build.

      Albert Schmidt
      Sales and Marketing Manager, Partner
      Erb and Erb Insurance Brokers Ltd.
      Reply 2015-10-08 5:47 AM

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